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Stopping Cybertheft Not a Walk in the Park

12:00 AM, Jun 15, 2013 • By IRWIN M. STELZER
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Chinese president Xi Jinping and U.S. President Barack Obama doffed their ties, rolled up their sleeves (well, at least Obama did), and even took the now-obligatory stroll around the Sunnylands Estate in Rancho Mirage, California, in the manner of Eisenhower and Khrushchev at Camp David, and Reagan and Gorbachev in Switzerland. This enabled the leaders to “establish and deepen their personal relationship,” according to Tom Donilon, Obama’s national security adviser at the time of the meeting. It “laid a reasonable basis for cooperation,” enthused the pro-Obama New York Times. “A relatively upbeat encounter,” according to the Financial Times.

obama walks alone

Good news but, unfortunately, largely irrelevant to the future of relations between the emerging superpower and the incumbent. Xi did agree to join Obama in fighting greenhouse gasses -- but did not announce the cancelation of any of the almost 400 coal plants under construction that will add hundreds of times the coal-burning capacity planned in the U.S. Yes, there will be future meetings of high-level officials, most notably at the next round of the on-going China-U.S. Strategic and Economic Dialogue in Washington shortly after the Fourth of July holiday. But aside from the few agreements always announced to avoid a communiqué that admits failure, there is little prospect that China can or will make the concessions necessary for an agreement on the nettlesome issues of trade and theft of intellectual property. These issues are rooted in institutional differences that make comity a virtual impossibility, no matter how chummy Xi and Obama become.

Start with trade. From time-to-time, China’s trading partners slap the regime on the wrist -- tariffs on cheap tires coming into the US, or proposed on solar panels imported into the EU. But they have no answer to two features built into the Chinese system: currency manipulation and the use of state-owned enterprises (SOEs) to do the nation’s business. China continues to hold down the value of the yuan in order to maximize exports, keep its factories humming and its millions of restive rural-to-urban migrant workers merely sullen, rather than mutinous, as some have recently been in response to harsh working conditions and low pay. Chinese workers and other consumers are paid in a currency with artificially limited ability to purchase the goods and services being pedaled on the world market. If they don’t like it, they can ….. Well, not do very much.

Worse still is the problem created for market-based companies in the US, UK and other countries by China’s state-owned enterprises. These SOEs are obliged to maximize the total sum of their profits and the value of geopolitical advantages their deals generate for the Chinese nation. So, when companies here find the price Iraq is charging for access to its oil reserves simply too high to leave anything over for shareholders, Chinese SOEs make an offer that reflects not only their own profit requirements, but in addition the contribution of that energy supply to national security. Or when SOEs price goods for export, nothing as prosaic as near-term profit requirements set the floor under their price if the regime sees a national interest in making the sale. These advantages of Chinese SOEs over US companies are not something Xi is prepared to negotiate away, no matter how many agreeable strolls he and a succession of American leaders might take in various pleasure spots.   

Then there is cyberespionage, which according to Xi is a fiction created by enemies of his country. The two leaders did agree to establish a working group to tackle the problem of cybersecurity, with Obama hoping to persuade China to end attacks and IP theft from businesses and the US military by hackers linked to the Chinese military, which Xi heads (he is also top man in the Communist Party and head of State). Unfortunately for the American side, it has no credible threat of tit-for-tat retaliation. America has lots of intellectual property that is worth stealing, China has very little. A war based on steal-what-you can therefor favors the Chinese, who can aim at lush corporate targets, while America would find slim pickings in the archives of China’s largely IP-hungry SOEs. US security officials call cybertheft of intellectual property “the greatest transfer of wealth in human history”, costing the US $340 billion and the UK $44 billion annually, or about 2% of each country’s GDPs. Obama could, of course, tell Xi to call off  his cyberspies, or else. Or else -- America’s techies will do to China what some unidentified country’s cyber warriors did when it deployed the Stuxnet computer worm to impede Iran’s drive for a nuclear weapon. Or else -- America will impose sanctions, or deny visas to complicit Chinese officials who might want to visit their children at Harvard. “If the US wishes to stop the Chinese economic cyber-espionage, it will need to increase the costs and reduce the benefits to China of such activities….The US could impose economic sanctions or deny visas to suspected cyberspies,” writes Irving Lachow, a director at the Center for a New American Security, a Washington-based think tank.

But Obama dislikes “or else” and has drawn red lines before, only to ignore them when America’s adversaries pay them no heed. Besides, the doctrine of “proportionality”, voguish in Washington, prevents America from going beyond tit-for-tat to deploy the full range of its technical know-how in response to Chinese cyberspying. The advantages that cyberspying and SOEs give China over international economic and geopolitical competitors, permit Xi to  smile and smile, take off his tie, stroll with Obama, even leak the news that he might consider taking China into Obama’s cherished Trans-Pacific Partnership free trade agreement. But he is not likely to modify a system that has inherent in it the incentive and ability to cyberspy, under-value the yuan, and use SOEs to out-manoeuvre ordinary profit-maximizing businesses in the US and in other market-based economies.

Obama has flexed one muscle. He is redeploying U.S. military assets to China’s backyard, a policy known as the Pacific pivot, in part to satisfy demands of our allies in the region. But, as Xi is aware, America’s commander-in-chief has demonstrated an unwillingness to use such assets lest such a muscular policy interfere with his effort to reduce America’s footprint in the world. 

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